Note: This article was originally published on July 21, 2022 and was updated on July 28, 2022 to reflect new legislative updates.
It often seems that Washington moves at a glacial pace. Other times, like today, legislative tax updates are coming to us at warp speed. Yes, we’re talking (again) about breaking news on Build Back Better, CHIPS, and cryptocurrency.
The Build Back Better Act
There's a Manchin on the Hill and, apparently, Senators Schumer (D-NY) and Manchin (D-WV) were making music there all along. Last week (doesn’t that seem so long ago?) we told you that the Build Back Better Act was unlikely to pass due to Sen. Manchin’s opposition. Unknown to almost anyone – except the staff writing (cutting and pasting) the 725 page bill – Schumer and Manchin were negotiating what would be acceptable to the West Virginia Senator and inflation fighter.
The first 40 or so pages of the bill, now known as the Inflation Reduction Act of 2022, are the minimal tax provisions. These include:
- The much discussed 15% minimum tax on corporation
- Further tightening of the carried interest rules:
- Extending the holding period to 5 years
- Including real estate gains but with a 3 year holding period
- Reducing the holding period to 3 years for taxpayers with Adjusted Gross Income of less than $400,0000
- IRS funding for expanded tax enforcement
Not included in the bill are:
- Expansion of the SALT deduction cap
- Expanded child care credits
- Income tax surcharge on the wealthy
- Surcharge on corporate stock buybacks
Restoration of R&E Cost Expensing Moves to the Back Burner
We also reported last week that there was a chance that a one-year extension of the requirement to capitalize and amortize research and experimentation costs might be included in CHIPS. Now that the Senate has passed the bill, it's headed to the House of Representatives and may get to President Biden by the weekend. And it does not contain the R&E expensing provision. Maybe it will be in the government funding bill which must pass by October 1st. Maybe there will be tax extender legislation after the mid-term elections in November. Or maybe capitalization and amortization is here to stay for a while.
The implications are as follows:
- Section 174 includes expenses that are not eligible for the R&D Tax Credit such as utilities, depreciation, legal fees, and other incidental costs which now need to be tracked separately.
- Estimated tax payments for 2022 should assume that such costs are not immediately deductible.
- Consider the implications of capitalized R&E expenses on uniform capitalization calculations and, for those who have certified financial statements, on provisions for income taxes.
Do You Want Your Change in Legal Tender or Bitcoin?
Once retailers like Tesla, Starbucks, Whole Foods, AT&T, and Home Depot started accepting cryptocurrency as payment, we told you and told you again that if you pay for goods or services using digital currency, you will have a capital gain or loss equal to the difference between the fair market value of the goods or services you received and your adjusted basis in the exchanged digital currency.
Well, Senators Pat Toomey (R-PA) and Krysten Sinema (D-AZ) want to change that, at least for small purchases. They have introduced the Virtual Currency Tax Fairness Act (S. 4608) which would exempt from taxation transactions of $50 or less or cryptocurrency gains which do not exceed $50. The exemption would be on a transaction-by-transaction basis. So, when you order your quad long shot grande in a venti cup, half caf double cupped no sleeve salted caramel mocha latte and pay for it with Bitcoin, you’ll be fine. If you are buying supplies at Home Depot to build a tiny house, you’ll likely have to make over 1000 separate purchases to get under the limit.
And despite widespread industry support and bipartisan sponsorship, the Responsible Financial Innovation Act ("RFIA") introduced by Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) is likely not going to make it out of committee this year. Bloomberg Tax reported Sen. Lummis as saying, “the wide-ranging scope of the legislation may make it difficult for lawmakers to digest quickly.” Uh huh. And again, it’s an election year.
IRS FAQs – Now with Even Greater Reliability
In October, we told you that the IRS had updated its procedures for issuing Frequently Asked Questions (“FAQs”) on major tax issues and adding penalty protection for those who rely on them. Now, the IRS Chief Counsel has issued a notice which provides certainty for the legal review of FAQs, reiterated the penalty protection, and added additional areas where FAQs may be promulgated. The original guidance limited FAQs to new legislation and emerging issues. Now, those emerging issues may also include “emerging issues, as appropriate, where no pre-existing Internal Revenue Bulletin guidance, including regulations, has been issued.” One point, while taxpayers are granted penalty relief, there is still no discussion of whether return preparers will have a reasonable cause defense when relying on FAQs.
The CHIPS for America Act 2022
The Creating Helpful Incentives to Produce Semiconductors (“CHIPS”) for America Act is part of the America COMPETES Act, currently sitting in the Conference Committee. The CHIPS Act itself — designed to support domestic manufacture of semiconductors — has been around since 2021. Senator Mitch McConnell (R-KY) had promised to block the CHIPS bill if the Democrats moved forward with the aforementioned reconciliation bill. That bill has already passed the Senate so House Republicans, who previously expressed support for the CHIPS legislation, now say they will oppose it. That may not matter.
The bill, which is 1055 pages long, includes grants for semiconductor manufacturing, a 25% investment tax credit, and funding authorizations for the National Science Foundation and the Energy Department Office of Science and Technology. A completely unrelated provision that did make it into the bill (because of the arcane Senate legislative process) is $19.4 million to provide protection for Supreme Court Justices and their clerks. Left out of the bill are any trade provisions. Also left out is complete restoration of deductibility of research and experimentation expenses. The 2017 Tax Cuts and Jobs Act (“TCJA”) included a revenue raising provision requiring that such costs be capitalized and amortized over 5 years beginning January 1, 2022. It is possible that a one year delay in the capitalization and amortization provision will be included in the final bill. What’s not in the bill is any revenue raisers to pay for the grants, credits, and scientific or protection funding.
The House has once again included the Secure and Fair Enforcement (“SAFE”) Banking Act of 2021 in the National Defense Authorization Act (“NDAA”). It did the same with the 2022 version of the NDAA only to have the provision removed during negotiations with the Senate. The 2023 version seems destined to suffer the same fate. The Senate seems poised to consider its marijuana legalization bill. It, too, may go up in smoke.
Rep. Matt Gaetz (R-FL) just discovered the Internal Revenue Service (“IRS”) owns guns. On July 1, he — along with co-sponsors Reps. Paul Gosar (R-AZ), Jeff Duncan (R-SC), and Marjorie Taylor Greene (R-GA) — introduced a one sentence bill entitled, “Disarm the IRS Act.” The bill reads, “notwithstanding any other provision of law, the Internal Revenue Service may not acquire (by purchase or otherwise) any ammunition after the date of the enactment of this Act.” It was promptly referred to the House Committee on Ways and Means where it will presumably languish until the end of the session.
Happening in Pennsylvania
Internal Revenue Code Section 1031 turned 100 last year. While some states — New York, Maryland, and Georgia, for example — have special rules for tax-free exchanges and California has a claw-back rule, the Commonwealth of Pennsylvania, alone among the states, did not recognize Section 1031 exchanges. The Commonwealth has now joined the rest of the nation. On July 11, Governor Tom Wolf signed legislation conforming Pennsylvania’s treatment of tax-free exchanges effective January 1, 2023. Taxpayers with Pennsylvania property they are planning to exchange may want to consider completing those exchanges after the new year.
Meanwhile in West Virginia
Joe Manchin’s home state had its greatest year of revenue collection in history. As a result, Governor Jim Justice is calling the legislature back into session to enact a permanent 10% cut in the personal income tax rate. The Senator has not expressed an opinion on the tax cut, but presumably he’s a fan.
And Don't Forget About Delaware!
Reminder – Delaware sent out unclaimed property notices on or around July 22. These notices are normally addressed to a corporate officer and come through the US Postal Service. If you received a notice you must respond within 90 days or risk being turned over to the Department of Finance for an audit that could span a 15-year lookback. Given that personnel may be working remotely, it is common for this type of notice to go undetected until after the deadline has passed. If you receive any unclaimed property notice from a State, discussing your company’s options for risk mitigation could save the company significant money in internal resource time taken to defend an audit as well as significant unclaimed property assessments not based on true unclaimed property but rather an assessment based on what the company could not support. Our short-term recommendation: have someone on the lookout for any mail coming in that may be in regards to unclaimed property.
Count on Friedman
As always, you can count on your Friedman LLP advisor to keep you updated as tax laws at the federal and state level continue to evolve. Keep in mind that evolution also produced the platypus. Stay tuned.